Mortgage lenders 'ignore base rate'

Oct 12 2007 By Gabrielle Fagan

Banks are now starting to go their own way over home loans

The uk interest rate decided by the Bank of England is losing relevance when it comes to setting the cost of a mortgage, it has been claimed.

New mortgage rates are continuing to move in different directions despite the latest Bank of England decision to keep interest rates at 5.75 per cent.

The UK's second biggest mortgage lender, Abbey, has continued the trend of lenders raising their variable rates but cutting the cost of their fixed-rate deals.

Louise Cuming, head of mortgages at website Moneysupermarket.com, said: "It does show that whatever the Bank of England does really isn't as relevant any more, as lenders will do what they want.

"All lenders are looking at their bottom line and it's costing them a little bit more to borrow money and that is going to be passed on to the consumer."

Abbey is to increase interest charged on its 100 per cent first-time-buyer tracker mortgage by 0.45 per cent, while the rate of its discount two-year variable tracker is being raised by 0.1 per cent.

But at the same time it is cutting the rates on its long-term fixed-rate home loans by up to 0.36 per cent, following a fall in swap rates which allow lenders to buy money for a specified term and at a specified rate. Spokesman Nici Audhlam Gardiner said: "Falling swap rates mean we've been able to cut the rates on our long-termfixed-rate products and the new rate on our 100 per cent product reflects the market's current price for no-deposit products and our competitive position.

Northern Rock has also pulled two-thirds of its mortgage range in the first change to its products since it applied to the Bank of England for emergency funding, saying it was "simplifying" and "streamlining" its mortgage offering, as well as respondingto the current market conditions.

The announcement by Abbey is in line with action taken by a number of lenders since the middle of last month, with groups increasing their variable rates in the face of higher borrowing costs as a result of the global credit crunch.

Abbey was the first lender to increase some of its tracker rates by between 0.1 per cent and 0.2 per cent for new borrowers in the middle of September, and it was quickly followed by Halifax.

Banks are raising their rates in response to the inter-bank lending rate recently hitting a six-year high as a result of the turmoil in world financial markets.

And while this has actually come down in recent days, other lenders are still expected to increase the cost of their tracker-mortgage deals in the near future.

But at the same time as variable rate loans are increasing, the cost of a fixed-rate mortgage is coming down in response to a fall in swap rates, upon which the interest rates of these loans are based.